COLUMN-Circuit breakers investors can use for a debt default

CHICAGO Oct 7 (Reuters) - In times of calamity, every
portfolio needs a set of circuit breakers.

And, as Congress speeds toward the debt-ceiling barrier, it
is a good idea to consider some inverse exchange-traded
funds(ETFs) that move in the opposite direction of stock and
bond indexes.

The first major hurdle is Oct. 17, when the Treasury will
need authority to sell more debt securities - or face default on
its obligations. What if markets get spooked over Washington's
inability to reach a consensus on fiscal matters? If traders
truly believe that Congress won't issue more debt to pay bills
it has already racked up, that will send interest rates on
Treasury paper soaring.

You can hedge political risk a number of ways with inverse
ETFs. One worth considering is the ProShares Short 7-10 Treasury
ETF, which gains if Treasury bond yields rise (and
prices drop). During the past year through Oct. 4, the fund rose
2.4 percent, compared with a negative 1.7 percent return for the
Barclays U.S. Aggregate Bond Total Return Index, a proxy for the
U.S. bond market. The fund charges 0.95 percent for annual
expenses.

Of course, a debt-ceiling duel would do much more than
depress bond prices and the damage the faith in the credit of
the U.S. government. It would severely cripple the U.S. economy
at large. Government would have to cut spending by at least
one-third. That means everyone from defense contractors to
Social Security recipients would have to wait for their checks.
Another recession could be triggered.

Jack Ablin, chief investment officer of BMO Private Bank in
Chicago, puts it bluntly in a recent analysis: "While
eventually business as usual will be restored and the stock
market will ultimately recover, closing down 18 percent of our
economy will leave a mark. Defaulting on Treasury obligations
would foist the nation into a financial tailspin."

The stock market would eventually feel this pain most
acutely. One way of hedging against that is the all-purpose bear
ETF, the Direxion Daily Total Market Bear 1X ETF. It
tracks the reverse performance of the MSCI U.S. Broad Market
Index, and charges 0.67 percent of assets annually. Since U.S.
stocks as measured by the S&P 500 Index are having a good year -
up 16 percent through Oct. 4 - the bear fund is down nearly 19
percent through Oct. 4.
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